Why Japan is propping up the yen with US help

How effective is currency intervention?

When Japan intervenes in currency markets, the immediate impact is typically sharp. Past episodes show the yen strengthening by around 2 yen against the dollar within seconds and by 4 to 5 yen within hours. However, the impact is often only temporary unless the economic fundamentals driving the trend are also addressed.

Foreign reserves are intended to protect the economy during major financial shocks or unexpected events, not to prop up the currency indefinitely. Although intervention can buy time until market dynamics change, unilateral intervention is unlikely to reverse a broader market trend.

The limits of intervention were on display when authorities intervened on Apr 30, and potentially in the days that followed. While the effect was immediate and pronounced – with the yen strengthening sharply against the dollar – the rally soon faded. On Jul 23, the yen hit a 40-year low of 163.99.

The currency’s rebound in late July came with help from the US, a potential game changer for dealing with yen bears. The joint intervention was likely larger than those undertaken in 1998 and 2011, when US contributions didn’t surpass the US$1 billion mark. 

Japan alone was estimated to have spent US$53 billion on Jul 30 – a likely single-day record – before spending an estimated US$34 billion the following day.

Can authorities keep intervening to prop up the yen? 

The question is not whether the government can keep intervening but if and when it makes sense to do so. The finance ministry’s foreign reserves – at US$1.09 trillion as of the end of June – gives authorities ample financial firepower. Japanese Finance Minister Satsuki Katayama has flagged that Japan would also utilise a US Federal Reserve facility that provides central banks with dollars using Treasury holdings as collateral.

There are other considerations policymakers must also weigh up. Sharp moves caused by direct intervention can create headaches for businesses trying to price goods, make payments and hedge against exchange rate fluctuations. They can also inflict huge losses on traders betting that the currency will keep moving in the previous direction.

For the government, intervention also carries political and diplomatic risks. It can draw criticism over currency manipulation, although that tends to be more likely when intervention is aimed at weakening the yen, a direction that can help exporters with trade. That charge is harder to argue when the government acts to support the yen.

Can authorities boost the yen in other ways?

Beyond direct intervention, Japan could try to combat the weak yen by addressing broader monetary and economic fundamentals. In theory, tightening monetary policy should help by narrowing the interest-rate differential with the US, making yen-denominated assets more attractive.

In practice, however, the difference in policy rates between the two nations has already shrunk to less than half of what it was just before the BOJ ended its negative interest-rate regime in March 2024 – yet the yen has continued to retreat.

Other measures could involve encouraging companies to repatriate capital and invest more at home. Greater domestic investment could increase demand for yen-denominated assets, while stronger economic growth could make Japan more attractive to foreign investors over time. 

Takaichi released a strategy plan in June aimed at bolstering private-sector investment in key industries such as artificial intelligence, semiconductors, defence and shipbuilding as part of a broader effort to boost Japan’s growth rate.

Finance Minister Katayama recently urged Japan’s large pension funds, including the Government Pension Investment Fund, to increase investment in domestic assets and floated the idea of adding government bonds to a tax-free investment program for individuals. 

Takaichi also flagged the importance of encouraging households and the GPIF to increase their investment in Japanese financial assets. The remarks briefly supported the yen, and some strategists say they suggest that Tokyo may be exploring new ways to influence the currency.

Fiscal reforms, such as curbing government spending and reducing the country’s massive national debt, could also support the yen over the longer term by increasing confidence in Japan’s public finances and improving the appeal of Japanese assets.

However, most of these measures would likely take time to bear fruit.